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In Retirement, the Ride Matters

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September 22, 2015 In Retirement, The Ride Matters: New American Funds Study Identifies Three Criteria for Selecting Actively Managed Fund Portfolios that Generated More Wealth for Retirees Compared to Index Portfolios

LOS ANGELES — Recent market volatility has led many investors — especially those nearing or in retirement — to consider how resilient their mutual fund investments may be during market downturns.

A new study published by American Funds, a family of mutual funds from Capital Group, one of the world’s leading investment management firms, identifies three critical factors for selecting retirement investments: a low expense ratio, high manager ownership and a low downside capture ratio, which measures how a fund has fared relative to the market during downturns. The study found that over the last 20 years, actively managed equity funds sharing these three factors significantly outpaced indexes and active peers in a withdrawal scenario.

“After years of investing during their working lives, millions of baby boomers are beginning to draw on these savings for their retirements,” said Rob Lovelace, portfolio manager and senior member of Capital Group’s management committee. “The needs of these investors change as they move from growing their nest egg to living off of it — protecting their savings against market downturns while continuing to build wealth becomes even more important. By seeking active managers who keep fees low, have their own money in the fund and do a better job of limiting the impact of market downturns, investors who are nearing or are in retirement are, we believe, well-positioned to outpace index returns and build sustainable retirement income.”

The study examined actively managed U.S. and foreign large-cap equity funds, Moderate Allocation funds (mix of U.S. stocks and bonds) and World Allocation funds (mix of global stocks and bonds), as categorized by Morningstar. The research showed that, after accounting for regular withdrawals, funds sharing the three critical factors collectively outpaced indexes over the last 20 years, a period that includes the dot-com and financial crisis downturns. The same was true when looking at rolling 10-year periods within that same time frame.

Market downturns can be particularly harmful to retirees because they are drawing regular income from their portfolios and, without a salary to make up for losses, they could suffer serious setbacks.

“One of the keys to retirement investing is doing better in bad times,” Lovelace said. “People need to hold more equities to generate stronger long-term returns for a retirement that can last decades. But stocks introduce more volatility than bonds, and investors need to think about downside resilience.”

The American Funds’ study, titled Key Steps to Retirement Success: How to Seek Greater Wealth and Downside Resilience, looked at a hypothetical 65-year-old retiring with $500,000 in savings in 1995, with a plan to withdraw 4 percent initially each year (increasing by 3 percent annually to account for inflation).

A portfolio split between Moderate Allocation funds and World Allocation funds sharing the three factors would have generated 85 percent greater wealth than a blended index after 20 years. Importantly, this investor would have been able to withdraw a total of about $537,000 over this period — and would still have had $1.7 million leftover. In addition, this portfolio of low-expense, high-ownership and low-downside-capture funds beat the index while experiencing less volatility (as measured by standard deviation) and greater risk-adjusted returns (as measured by Sharpe ratio). A similar portfolio of funds managed by American Funds would have generated 105 percent more ending wealth than the index leaving the investor with $1.9 million at the end of the period.*

About The Capital Group

The Capital Group is one of the oldest and largest funds management groups in the world, managing equity, fixed income and private equity assets for all types of investors. Since 1931, Capital Group has been singularly focused on delivering superior, consistent results for long-term investors using high-conviction portfolios, rigorous research and individual accountability. Today, Capital Group manages more than US$1.4 trillion in long-term assets for millions of individual and institutional investors around the world.

The Capital Group companies manage equity assets through three investment groups. These groups make investment and proxy voting decisions independently. Fixed income investment professionals provide fixed income research and investment management across the Capital organization; however, for securities with equity characteristics, they act solely on behalf of one of the three equity investment groups.

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Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the mutual fund prospectuses and summary prospectuses, which can be obtained from a financial professional, and should be read carefully before investing. Similar information about collective investment trusts can be obtained from Capital Group or participants’ plan provider or employer.